A 1-In-100 Blogger

Friday, November 2, 2012

Democrats will say the craziest things when talking politics. Liberal mathematicians forget math, liberal engineers forfeit logic, and liberal economists will relinquish statistics when it comes to defending their political base. If all else fails, they may even resort to tactics of Saul Alinsky. To defeat Romney, however, whose record is so squeaky clean it drives the liberal media nuts, they must treat him as though he's been President the last four years.

Despite four years of Obama's disastrous economic policy, democrats are attempting to deflect blame from Obama by pretending the economic mess was created by (gasp!) ...Romney? They'll quote their favorite bias liberal news source and spout things like: "Sounds like Romney reeeeeally cares about American jobs..."

Mirror, mirror on the wall, who's the biggest spender of them all?

Below is a real conversation that took place between a misinformed democrat and my brother, Chris. Unbeknownst to the misinformed democrat, Chris just so happens to hold a degree in political science and probably knows more about how the liberal mind works than democrats themselves. After all, the left is always in denial about their true intentions. Only recently under Barack Obama have liberals become more open about their appreciation for socialism.

It's sad, really, but the truth.

So after a random drive by email from a misinformed democrat lands in my brother's inbox, he reads it and is essentially told that it's somehow Romney's fault that our economy is in the tank. Chris then did what any well informed conservative would want to do: He took it upon himself to defend capitalism. No insults. Just the clear, honest facts.

Chris responds to drive-by email: "Blaming Romney for not saving jobs that were already lost?"

Misinformed democrat rants in reply: "To be clear, I do think Romney is part of the problem, but, I blame millionaires like Romney who use their money to create this economic climate."

Chris: "Capitalism isn't the enemy, neither are millionaires. I think this country could use more of both."

This frustrates the misinformed democrat. So he resorts to a liberals most basic defense mechanism: Accuse conservative's of what the left is actually up to.

Misinformed democrat: "You say jobs already lost...? If you think you have a valid point (rather than repeating some buzz phrases), I would love to hear it."

Companies like VC Bain acquire American companies, take out insurance policies betting against their success (forced failure), inevitably after this forced failure collecting millions in insurance $$$, find cheaper labor in China ((surprise surprise) where workers are paid pennies to the dollar for their labor) ship all these American jobs over-seas (wonder why middle American families can't find work).

Successful businessman demonized by big government

Chris's response is brilliant, laid out in full, below:

I do have a valid point and will try to remove all buzz phrases from my explanation. I will even try to use your example (Sensata) even though Romney was 6 years removed from Bain by the time they acquired the business.

So you don’t like private equity firms in general, including the people running those companies. Why? There is nothing immoral about what these institutions do. I don’t think you and I will agree on that. You said it yourself, “fuck capitalism.” Regardless, I will attempt to help you understand where I am coming from when I said jobs were already lost. It all has to do with the concept of “creative destruction.” I sent you the link to a very good explanation of how creative destruction benefits society. You either disagreed with the concept, didn’t read it, or didn’t understand it. Which is it?

Companies come to Bain when they need capital. It means they are either in trouble or need help growing. By the time Bain steps in the purchase a company (i.e. provide capital), the underlying business model is either on the verge of bankruptcy or is otherwise unhealthy. In the US our expensive labor costs have forced businesses and factories to make unavoidable tough choices. That means the jobs are already at risk of being lost unless the business can be saved. That’s why I suggested the jobs were already lost. Not every business is savable (hence the need for insurance). If a business is pulling in profits hand over fist they don’t need Bain’s money to survive. Companies need private equity firms to survive and grow and there’s nothing immoral about the relationship.

Private equity firms acquire companies (not just American) ONLY if they think they can make money from the acquisition. There’s few exceptions (like tax shelters – perfectly legal and nothing immoral). It’s also common and necessary to take out insurance policies on large financial investments. When you have millions of dollars at risk it’s insane not to hedge your bets, that’s something most companies do. The insurance company selling the insurance policy doesn’t do it out of the kindness of their hearts. Their goal is to make money selling the insurance. They don’t make money insuring “forced failures.” That’s why they use actuaries and teams of researchers to evaluate business plans, financial numbers, and market conditions to assess risk. How much Bain is charged for the insurance policy is based on the riskiness of the plan. Both parties in this transaction are acting in their own interests. There’s nothing immoral about the insurance policies.

If you disagree with this then I’m not convinced you understand the role private equity plays in the economy, or perhaps you disagree with the merits of what they do for society. When you complain about shipping jobs overseas it ignores the fact that the economy isn’t a zero-sum game. When assets are re-allocated (sold) overseas, the money made from the sale is redirected to fund more companies pursuing profits (and creating new jobs along the way). Some companies fail, but one way or another the private equity firm is going to extract the remaining value of the failed business and re-risk it on new business ventures and opportunities. Out with the old, in with the new. That’s creative destruction and there’s nothing immoral about it.

Even though I hate arguing against anecdotal evidence like this I looked into Sensata, apparently Texas Instruments sold the company to Bain in 2006 (around 6 years after Romney left Bain.) So why did TI sell if it was such a great business? Private equity firms get involved when companies are in trouble. Texas Instruments wouldn’t have sold Sensata if they were making too much money from the business unit. Sensata may be the “standalone global leader in sensors and controls”, their products may be the most advanced on the market, but unless their profit margins are growing the business is considered unhealthy. Anything less than growing profit margins will result in stagnation and decline. Society is much better off allowing the private equity firms to purchase and reallocate business resources because it ultimately ends up funding and creating newer and modern jobs. The dollars Bain made by selling assets overseas could be the same dollars funding Aaron Averbuch’s startup company. Not only is there nothing immoral about it, but the organic nature of the markets cyclical process requires no government intervention or taxpayer subsidies to create new jobs.

When government intervenes and attempts to save jobs it almost always backfires (SEE: GM). Instead of going out of business (or reorganizing the business in bankruptcy court), inefficient (and politically connected) producers hang on, at a high cost to consumers or taxpayers. Right now our economy is flush with crony capitalism, government and businesses are trading favors based on personal relationships and political connections instead of profitable enterprise. When government intervenes to pick the winners and losers, the losers end up producing at a cost to taxpayers instead of producing for a profit for themselves and paying taxes into the system. And the “winners” end up going out of business because their competitors have the unfair advantage of a helping hand from the government. That is immoral and worthy of criticism because it removes the incentive for entrepreneurs to risk assets creating new businesses. This is what is creating our dismal economic climate and explains why middle American families can’t find work.

Millionaires like Romney put their money back into the market. If you want to get mad at millionaires, direct it towards the ones that sit on their money instead of risking it on new businesses creating jobs. Private equity firms in the US are not inherently evil or immoral, they also DON’T have the ability to create an economic climate like you suggest. Gov’t policies, monetary policy, tax policy, and international trade policy all play a much larger role in shaping the economic climate than a private equity firm. Since Romney has not been in a position to shape any of these policy arenas I find it difficult to understand how you can blame him or private equity in general for the economic climate. Govt housing policy, govt mandated mortgage-lending standards, and loose monetary policy is what fueled the housing boom and the bust in 2008. Not private equity.

Explain to me where the immorality in private equity exists. At what point does the private equity firm become the evil monster you see. You claim everything I wrote is just my opinion, but I don’t think that’s true. I only stated whether I thought it was immoral or not, the rest of the explanation was not opinionated at all. I explained step by step what happens when private equity takes over a company. What am I wrong about?

If immorality exists in one of these common business practices please elaborate. Or is your assertion that the individual steps on their own are not immoral, but the ultimate consequence of losing jobs is immoral?

You wanted to bring up how Bain loads these companies up with massive amounts of debt before the “forced failure,” but that ignores the fact that SOMEONE had to loan the company the money. Did Bain dupe the bank that secured the business loan to the company?

When does the immoral behavior occur?

Is the Private Equity firm immoral when they risk capital investing in a business?

Is the Private Equity firm immoral when they secure a business loan from a bank? (load them up with debt…?)

Is the Private Equity firm immoral when they buy an insurance policy to hedge their bet? (Forced failure…?)

Is the Private Equity firm immoral when they collect on the policy? (Business fails despite the capital injection…?)

Is the Private Equity firm immoral when they are forced to deal with the carcass of a failed business (selling factory assets overseas…?)

Is the Private Equity firm immoral because they couldn’t save a business? Because they didn’t try hard enough? Because they were able to make a profit regardless of the jobs lost?

Is the Private Equity firm immoral when they extract the remaining value of the failed business and re-risk it on new business ventures and opportunities?

Is the Private Equity firm immoral because they did not seek government handouts to subsidize an inefficient business model?

Does immorality exist in the economic pain experienced by the town with the closed factory? Because the private equity firm does not share the economic pain? Would it matter whether the employees received severance packages when the factory was closed?

At what point in the relationship between Bain and Sensata did immorality occur?